Bear markets are difficult, we know, because this is our third.
However, this is business as usual for cryptocurrencies, it moves in cycles every four years. Surely many of you will be wondering: is it different this time? Is crypto dead? The short answer is no, but this time there are some small differences.
We all remember six months ago when markets were booming across asset classes and Bitcoin was at an all-time high of $69,420? AT that time, everyone wished that they had purchased crypto when it was cheaper. But now that the market is down and crypto is actually cheaper, those people are only scared to invest, and that’s totally understandable considering the current state of the market. Markets are a reflection of people. Our decisions are driven by emotions rather than rational thought. When there is a bull market, we are influenced by greed. When there is a bear market, we are affected by fear. This is how it always has been and always will be.
To understand why asset prices are falling across the board, including crypto, we need to start with macroeconomic conditions.
The age of cheap money
In response to the COVID-19 pandemic, central bankers around the world increased the money supply at an unprecedented rate. The US Federal Reserve quintupled the money supply (M1) (from roughly $4 trillion to $20 trillion) and kept interest rates close to zero. The European Economic Area followed suit, increasing its M1 from €9 trillion to €11.5 trillion, as did the UK, Japan, Indonesia and a wide range of governments around the world.
This massive insertion of capital into the market resulted in a bull market marked in history for asset prices, particularly “risk” assets. In a world of excess capital, investors tend to go for longer-term, riskier investments like TSLA, GME, and of course BTC and other cryptocurrencies. When this takes place, these assets act as “inflationary batteries”, storing the excess capital. This excess capital helped propel the United States stock market to all-time highs, at a time when the economy was at a complete standstill and we were all cooped up at home.
As this new money supply made its way through the system, we began to see a sharp rise in the Consumer Price Index (CPI), the most popular metric for measuring inflation. The CPI hit a 40-year high of 8.6%, a maddening figure considering many criticize the CPI for understating true inflation. As a result of increasing prices, the Federal Reserve had to take action. They announced that they would change course and implement quantitative adjustment measures, in addition to gradually increasing the federal funding rate. While not in full swing, the announcement of the reduction measures began to weigh on an economy still suffering from supply chain problems and the “inflation battery” began to wind down. This was further aggravated by the war in Eastern Europe and the implied geopolitical risks for the rest of the world.
As the era of cheap money has ended, so has the era of blazing returns on “risk” assets. While most consider Bitcoin to be an inflation hedge, the reality is that it still trades alongside other risky assets such as the Nasdaq (tech/growth stocks). Inflation hedge assets have a tendency to be psychological (like gold). It is clear that Bitcoin has a long way to go in this regard, as during this downturn it maintained its correlation with traditional markets, particularly tech stocks.
It is quite easy to predict what happens to these assets during periods of high inflation and macroeconomic uncertainty. In the battle between food, water and fuel against TSLA, BTC and ETH, the former will always win. This is why these assets are described as “inflationary batteries,” as they store the inflationary potential of the economy and trigger the inflation when the conditions which supported them change.
While the Fed’s intention has been to curb inflation, it indirectly caused these assets to deflate in the mainstream economy, making inflation even worse. This is the same phenomenon witnessed during the stagflation era of the 1970s in the United States and the post-World War I hyperinflationary era of the Weimar Republic.
The implications of Bitcoin
Now that we have established the macroeconomic context, we can delve into what is happening with cryptocurrencies, more specifically bitcoin. BTC accounts for nearly 50% of the total crypto market capitalization and is generally an indicator of the overall health of the crypto market. This is the fourth cycle of bitcoin. In 2012 prices fell by around 90%, then in 2015 and 2019 they fell by more than 80%. In this cycle, we are currently at a 69% markdown from the all-time high price. Notice that black line on the chart though, the price of bitcoin is clearly trending higher.
These reductions have historically represented generational buying opportunities. According to the data, this is business as usual for bitcoin. While that doesn’t make going through these price drops any easier, it gives us some additional perspective. If this is your first cycle, you now know why it is hard to HOLD ON. If it was that simple, everyone would be able to do it.
Is this time different, or not?
So is there something different this time? The answer is yes and no. While the adoption and infrastructure development undertaken provides much to be optimistic about, it is good to remember that Bitcoin was born during the last bear market and has yet to witness a global macroeconomic downturn. That said, looking at major blue-chip stocks, over the past six months, Wall Street darling Shopify has lost 75%, Netflix is down more than 70%, META (Facebook) is down by 50%, and TESLA and Amazon down 40%. The list keeps going on and on. Yet despite all this carnage, Bitcoin remains the world’s best performing asset since the Covid-19 pandemic, having grown by over 300%.
Where do we go from here?
Let’s end this article with some hope and context on the highest value proposition for bitcoin. Bitcoin is a disruptive technology and currency network that is growing exponentially. All disruptive technologies, such as the internet and smartphones, go through an S-shaped adoption curve and reach their main growth phase after roughly crossing the 10% threshold. According to a recent market research report by Blockware Solutions and ARK Invest, it is estimated that less than 1% of the world’s population are users of the Bitcoin currency network. Plotting it on the technology adoption S-curve, it looks as under:
As we can see, Bitcoin is still in the early stages of adoption. The fundamentals and the value proposition have not changed. Ask yourself, in the future, do you expect digital money like bitcoin and crypto to be used more or less? If we have begun to displace paper, a technology used for thousands of years, wouldn’t it be sensible to assume that we can do the same with something as common as gold?
Furthermore, long-term bitcoin HODLers have never been more resilient. Even with the current price decline, 66% of bitcoin hasn’t moved in over a year, an all-time high.
This behavior mimics the decline from 2017-2019, where Bitcoin went from nearly $20,000 to $3,000. During this period, 86% of those who had it at $17,000 never sold it. This is what encouraged billionaire hedge fund manager Stanley Druckenmiller to see Bitcoin as something with a finite supply where 86% of the owners are religious fanatics. While their language may be a bit extreme, these statistics bode well for the long-term growth and adoption of Bitcoin.
While bitcoin price declines are no fun, bitcoin’s fundamentals and long-term outlook tell a different story.
I hope that this article gives you some perspective and context on what is happening in the market. Will prices continue to drop? In the short term, perhaps, especially since inflation in the US is still at a 40-year high, and 50% of holders are still in the money.
The Federal Reserve is expected to continue raising interest rates, but in the long run, I strongly believe that the value proposition of bitcoin and some other cryptocurrencies is sound. The good thing about cycles is that, as the name indicates, they are cyclical, so they will eventually reverse. This too shall pass.
So what should we do now? For those of us who have prior experience of these cycles before, we continue to do what we have been doing for years; averaging the dollar cost in bitcoin periodically, regardless of price. I buy a small amount of Bitcoin each Thursday night. It has helped me take emotion out of the equation and has helped me sleep peacefully at night.
As the old proverb says, “time in the market, not timing the market.”